Thinking about Keynes and Fisher

Garett Jones has a new Econtalk on Fisher's debt-deflation theory, and he has this to say about Keynes and Fisher:

"I really do believe Fisher's 1933 Econometrica article offers a more complete model of the entire business cycle process than anything in Keynes's General Theory. It took Hicks, Alvin Hansen, and other interpreters to translate the General Theory into a complete model, one where you could intuitively understand who was making which decisions, how it all added up to a complete economy where everyone was being at least modestly rational. Fisher, by contrast, implicitly tells you: "Just take your old, familiar classical model, perfectly flexible wages and prices, but add in just this one thing: Debt contracts that are tough to get out of." Then he shows the the consequences of that one tweak. They are not small."

I'm not sure I agree with this rendition of the history of thought. It took Hicks, Hansen, and others to generate a new theory that changed Keynes and combined Keynes's points with older Wicksellian points. It was similar enough in spirit to Keynes's conclusions that it became an important part of Keynesianism as we know it today. Keynes was perfectly intelligible before them, it was just an indeterminate solution. That was the value added of Hicks and Hansen, not an interpretive value added.

Keynes also wasn't trying to explain busts specifically. He was trying to explain how the output level was determined. Obviously that has implications for thinking about depressions, though. But it's not surprising that a short article on depressions seems to offer a better explanation of depressions than a long book that's not on depressions!

There was also nothing particularly new in Fisher's article. Keynes made similar points in the 20s and there was nothing new in Keynes saying it. All of the older monetarists knew about these sorts of problems. As is true in so many cases, Fisher said it clearly and at a time where it really mattered which was why he is credited with the insight. It's like the Lucas Critique. Keynes made points similar to the Lucas Critique (as did many others besides Keynes). But the critique really had oomph in the 1970s, and so today we call it "the Lucas Critique".

Finally I'd just point out that it's hard (for me at least) to think about Keynes and Fisher separately or as competing theories. I think most Keynesians think about Fisher as expressing essentially the same constellation of ideas that Keynes was worried about, and in contrast to more liquidationist voices at the time.